If you have no credit history at all, it is sometimes better than having bad credit. However, it can be hard to get a credit card, a car loan or a mortgage if lenders have no way to evaluate if you’re able to make your payments on-time.
Having a credit report with little information in it can be daunting. This is often the case with teenagers, college students, or recent arrivals to the U.S. Not being able to open a postpaid cell phone account or having to get a co-signer if you want to buy a car or lease an apartment can be a headache, and not having any credit in your own name limits your ability to attain financial freedom. But the good news is that, unlike most negative credit activity, which stays in your credit file for seven years, you can start building credit much more quickly. You might not have good credit right now, but you can work your way up to it. From own my experience, In as little as six months of on-time payments on a credit card account or installment loan, you can generate a credit score. Why your credit score is so important A credit score is a numerical expression based on a level analysis of a person's credit files, to represent the creditworthiness of an individual. This helps a credit card company or a financial institution determine if they should extend you credit, and what interest rate you’ll pay. A credit score is primarily based on a credit report, information typically sourced from credit bureaus. The three major credit bureaus are Experian, TransUnion and Equifax. These companies compile your credit report, a collection of data points about your financial habits that are essentially the building blocks of your credit score. The most commonly-used credit scoring model is a FICO score, which ranks your creditworthiness on a scale of 300 to 850. VantageScore is another scoring model that was developed by the credit bureaus; it has the same numeric range, although its formula for assessing creditworthiness and risk is a bit different. Although the criteria vary by lender and borrowers’ individual circumstances, a score of 800 higher is generally considered excellent. Anything between 700 and 799 is very good, while anything between 580 and 669 is considered fair, and anything below 580 is considered poor. FICO uses five different categories of information to calculate your credit score: Payment history; amounts owed as a percentage of your available credit, also called your credit utilization ratio; length of credit history; the types of credit you have open, and how much of your credit is new credit. How a credit-builder loan can help build credit A credit-builder loan is an installment loan, meaning it has a set time frame, fixed interest rate and monthly payments. Unlike conventional personal loans, you don’t get access to the money when you take the loan out, but the advantage, especially for people who don’t have much extra money, is that you don’t have to pay upfront as you would with a secured credit card. A credit builder loan is a tool that can help you establish better credit even if your credit history is not the greatest. A credit builder loan is typically available through credit unions or a local bank. All you need to do is to open up a debt obligation or installment loan and pay it back each month on time, and that’s reported to credit bureaus. If you successfully complete a credit-builder loan’s repayment plan, you can then leverage into a secured credit card. In other words, having a secured credit card, which is revolving credit, along with a credit-builder loan, which is an installment loan, makes you more creditworthy in the eyes of lenders. You also don’t necessarily need a credit-builder loan to get an installment loan on your credit file. If you have student loans, those are installment loans, too, and making consistent on-time payments towards those also adds to your positive credit activity. Auto loans are another common example of installment loans. How a secured credit card can help build credit Another way to help build your credit is to obtain a Secured credit card. Unlike a credit builder loan, you get access to credit immediately with a secured credit card, but the drawback for some is that you have to come up with the money for a deposit. Visa, Master Card and Discover all offer secured credit cards.
With a secured credit card account, your credit limit is equal to a deposit you put down, and you are responsible for keeping your spending within that limit and making on-time monthly payments. The card issuer reports those payments to the credit bureaus, and some of the better secured cards include a built-in “on ramp” to transition you to an unsecured credit card after a set period of time, provided you don’t make any late payments. If you have some credit history but not a lot, you can also try getting a retail credit card as your first credit card. Store cards generally have lower credit limits and higher interest rates, but they’re also more readily available to borrowers with lower credit scores. Find out more ways to improve your credit by contacting us here a Home Realty today!